Irrational Loss Aversion

Recent events gave me the opportunity to catch up on reading, and I found myself reading “Sway – The Irreresitable Draw of Irrational Behaviour” by Rom Brafman and Ori. Although the book is light and enjoyable, it does touch on a topic that I find fascinating: irrational loss avoidance.
The topic was first presented by the authors using a simple economic study that examined the effect of changing egg prices on sales. Researchers found that consumers were more sensitive when prices increased than decreased. In this instance, a loss due to price increases was 2.5 times more severe than a gain (Putler 1992). People don’t rationally weigh losses and this leads to irrational behavior.
This idea was then applied to many examples, such as a KLM captain flying his 747 down a foggy runway into a second plane due to a delay. Or a financial advisor explaining to his clients how many of his clients won’t sell poor performing stocks once they are below the price they bought them at, even though the most likely outcome is that the stock will continue to fall (Brafman 2008). Individuals are afraid of realizing a loss that has already taken place, so they take on additional risks that may not be rational. The Harvard professor Bazerman, who conducted an auction for $20 bills, offered the best example. He offers an auction for $20 bills starting at $1 at the beginning of each semester. The auction is open to anyone who bids at least $1. Two bidders will be locked in a bidding war as they try to outbid each other and avoid the $20 loss. Professor Bazerman indicated that bidding has reached as high as $204. This is not unusual. Think about the last time you drove somewhere and were late. Did you drive faster, or more aggressively than normal?
Although the authors didn’t explicitly apply this dynamic for large projects, I can see how it has been manifested in projects I’ve worked on. This is because the nature of traditional waterfall projects would be very susceptible to this irrational loss avoidance. Imagine a project divided into three main toll gates: requirements/design, construction, and testing. Imagine that the first phase is nearing its conclusion, but the design is still not perfect. Or that an extra week is needed. Traditional project management would dictate that one would communicate any schedule slippages and move the date. My personal experience is that people will simply say “we’ll just make up time!”
One of my QA friends has often pointed out that his job as a QA professional requires him to be “the last to go and the first to be cut”. This implies that traditional projects tend to run longer through their earlier phases, which puts extreme pressure on QA to meet the original date. I wish I could say that I was strong enough to resist this dynamic when I worked on waterfall projects, but I was not. I was lured too often by the siren call of “making a date” and the treacherous rocks that had shipwrecked many vessels.
We all have a fear of losing something deep within our minds. With the modern large-scale waterfall development projects, we have created a system that delivers projects that plays to this fear. It’s no surprise that large projects often go over budget, yet they continue to move forward. As the ambitious MBA student trying to avoid the $20 loss, too many companies throw good money after bad in order to end a disastrous project. A large-scale project was just completed by a client of mine.

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